FDIC 2023 Risk Review: "Unrealized losses present a significant risk should banks need to sell investments & realize losses to meet liquidity needs."
In Q1 2023, unrealized losses at $515.5 billion. Also, "banking industry is increasingly exposed to the broad & varied risks from nonbank activities"
source: https://www.fdic.gov/analysis/risk-review/2023-risk-review/2023-risk-review-full.pdf
Agriculture:
- Despite facing droughts, the agricultural sector saw record profits this year. Farm banks earned more in the first quarter of 2023 due to increased loans and better loan yields after a weaker 2022.
- The farm sector's financial health improved, enhancing farm bank asset quality in early 2023.
- However, rising interest rates and production costs could be hurdles for the rest of the year.
Commercial Real Estate:
Banks have significant exposure to CRE lending.
- As of Q1 2023, CRE loans made up a quarter of all loans in the banking industry.
- CRE loans, relative to total assets, are nearing their 2009 peak.
- Challenges persisted in 2023, especially for office properties.
- Office demand has structurally decreased with weak rent growth affecting refinancing.
- Long-term leases protected office properties during early pandemic occupancy drops.
- Many office leases in large markets are set to expire in the next three years.
- Overall, CRE asset quality in banks remained good in Q1 2023.
- Potential challenges include rising interest rates, refinancing issues for office properties, and economic uncertainty.
Consumer Lending:
- Consumer debt rose, mainly due to increased credit card balances.
- A robust labor market has driven up consumer incomes.
- Higher inflation strained consumer budgets.
- Consumer savings decreased.
- Declines in equity prices impacted some consumer financial situations.
- Early signs of issues with consumer loans appeared in banks.
- Past-due rates on credit cards and auto loans increased.
- General asset quality was still favorable.
- Consumer loan performance might decline in 2023 if labor or economic growth falters.
- Auto loans displayed troubling asset quality trends; this could escalate if auto prices return to normal from elevated levels.
Energy:
- Energy prices declined in the latter half of 2022.
- Oil prices stabilized in early 2023 after receding from previous highs.
- The energy industry remained profitable despite price drops.
- Employment was sustained in states heavily dependent on energy.
- Bank loans to oil and gas firms reduced in 2022 compared to 2021.
- Community banks in energy-focused states saw improved asset quality in Q1 2023.
- Despite 2022's strong performance, the energy sector's outlook became uncertain by year-end and into early 2023.
Housing:
- Housing market slowed down in mid-2022 due to rising mortgage rates.
- Home price appreciation decreased in early 2023 from 2022 peaks.
- National home prices remain high, surpassing pre-pandemic levels.
- Strong demand and limited home supply maintained elevated prices.
- Home affordability reduced due to high prices and increased mortgage rates.
- First-time home buyers especially affected by reduced affordability.
- A significant increase in long-term mortgage rates led to fewer mortgage originations.
- Despite reduced originations, banks had higher residential mortgage loan balances.
- There was also an increase in residential construction and development lending.
Asset quality for residential mortgage loans was generally good.
- However, early indicators suggest potential credit quality issues.
Leveraged Lending and Corporate Debt:
- Corporate borrowing conditions worsened in 2022 and early 2023.
- Factors: high inflation, increasing interest rates, and economic slowdown.
- Sharp decline in corporate debt issuance.
- Leveraged loans issuance decreased, normalizing from 2021's record levels.
- High interest rates and slower economic growth might impact corporate debt markets.
Nonbank Financial Institution Lending:
- Bank lending to nonbank financial institutions (NBFIs) continued to grow, with larger banks leading.
- Community bank exposure to nonbank entities, especially nonbank mortgage lenders, was limited and decreased through Q1 2023.
- The banking industry has growing exposure to risks from nonbank business activities.
Loans to NBFIs are concentrated among global systemically important banks (GSIBs) and represented a considerable share of GSIB capital in first quarter 2023.
Small Business Lending:
- Small business conditions suffered due to high inflation and labor shortages.
- Consumer spending shifted towards services.
- Small business loans decreased in 2022, mainly due to the end of the Paycheck Protection Program.
- Asset quality of small businesses was stable, but there's a weaker outlook.
Liquidity and Deposits:
- Securities portfolios became less reliable for liquidity due to higher unrealized losses.
- Community banks saw a rise in deposit levels in 2022 and early 2023, even as the broader banking industry experienced a deposit decline.
- Loan growth in community banks was robust, surpassing deposit growth.
- This imbalance led to a reduction in liquid assets and a rise in wholesale funding.
- High interest rates remain a significant source of liquidity risk for banks.
Net Interest Margins (NIM) and Interest Rate Risk:
- Higher interest rates initially boosted NIMs, especially with strong loan growth.
- In Q1 2023, this trend shifted due to increased funding pressures and slowing loan growth.
- A significant rise in interest rates in 2022 led to depreciation in securities portfolios.
- Banks with more long-term assets saw greater depreciation and slower NIM growth compared to other institutions.
expectations vs reality...
Investment grade bonds produced a total return of negative 15.4 percent in 2022, and high-yield bonds managed a total return of negative 11.2 percent. In first quarter 2023, corporate bond issuance increased relative to fourth quarter 2022 but was down 14.9 percent year over year.
To address funding issues arising from lower collateral values, banks utilized the Federal Reserveโs liquidity facilities, including the new Bank Term Funding Program (BTFP), with borrowing rising to $64.6 billion as of March 31, 2023
TLDRS:
- FDIC releases 2023 Risk Review
- "Unrealized losses present a significant risk should banks need to sell investments & realize losses to meet liquidity needs."
- In Q1 2023, unrealized losses at $515.5 billion.
- "banking industry is increasingly exposed to the broad & varied risks from nonbank activities"
- High interest rates remain a significant source of liquidity risk for banks.
- Reminder, while banks have the liquidity fairy, 'we' get the promise of 2 more rate hikes this year, Atlanta Fed President Raphael Bostic yet again enrichens himself inappropriately from his position.
- To fix one end of their mandate (price stability) from the inflation problem they created, the Fed will continue sacrificing employment (the other end of their mandate) to bolster price stability by continuing to raise interest rates--causing further stress to businesses and households.
- I believe inflation is the match that has been lit that will light the fuse of our rocket.
